A Brew Apart

When it works, affinity-group marketing promises unique distribution channels, dependable customers, and -- the makers of Black Sheep Light Lager are betting -- a base to expand from

Fans of Saturday Night Live a few seasons back might recall a mock commercial about a gay beer. It was a table-turning send-up of the typical cheesecake beer spot, with comedians Chris Farley and Adam Sandler cavorting around a pool with a bunch of muscular dudes in skimpy bathing suits. A joke, right? Seriously, why would anyone want to brew a gay beer?

No joke; someone does, although it's not the beer that's gay but rather its target market. David Verzello and Mark Goodwin of the David & Mark Brewing Co. have good reasons to pitch their new light microbrew, Black Sheep Light Lager, to gay drinkers in Atlanta. Market research reveals that gay men and lesbians drink about 30% more beer than average and that they're nearly twice as likely to choose a light beer. Furthermore, they do much of their drinking in easily identifiable bars, patronized primarily by other gays and lesbians. Which means that to neophyte brewers Verzello and Goodwin, Atlanta's gay-and-lesbian-bar population is the kind of easily reached, thirsty market that their start-up venture needs.

It also doesn't hurt that the founders are themselves a gay couple living in Atlanta, which makes theirs the local brew and gives Black Sheep Light Lager an extra dimension of appeal to their first-round target customers.

But the founders' ambition goes beyond Atlanta and the gay market. They think they can grow Black Sheep into a national brand as mainstream as Anchor Steam or Sam Adams. The issue, of course, is whether success with Atlanta's -- and other cities' -- gay beer drinkers will impart enough momentum to carry the brew into mainstream venues, or just build a market-limiting image of Black Sheep as the "gay" beer.

In this joint venture, each founder plays a distinct role. Verzello, lanky, energetic, and 31, is the president and chief marketer. He is not, as he admits, much of a numbers person, so he's happy to leave the financial responsibilities to his business and life partner. Goodwin, 33, is the treasurer and has a type B personality that balances Verzello's type A. "I'm the risk taker," Verzello says. "Mark is the realist. I'm the balloon, and he's the guy holding the string."

When Verzello and Goodwin met, in 1992, neither had beer-business experience. Goodwin had brewed the stuff at home for five years, and Verzello, fascinated with the brewing process, had taken some college courses to learn more. Verzello learned that sales of "specialty beers" -- those from microbreweries and brew pubs -- had been growing at a compound annual rate of 47% since 1985, while overall beer sales had gone flat at about $50 billion a year. Goodwin and Verzello smelled opportunity here, but with more specialty beers appearing in 1994 than in the previous 12 years combined, they weren't the only would-be brewers to catch its scent. Besides having a great-tasting beer, Verzello and Goodwin decided, they needed another competitive edge. That's where the gay part came in.

The gay market is currently in vogue. Big-name companies such as AT&T and American Express court the gay dollar through ads, run in national gay publications, that depict same-sex couples. Beer and liquor companies -- for instance, Seagram, which markets Absolut Vodka, and Coors Brewing Co. -- stop short of crafting overtly gay ads but spend considerable cash advertising in gay publications and hosting on-site marketing events. In fact, it's hard to find a national gay glossy without an Absolut ad on its back cover.

Verzello had heard industry insiders say that they prized and targeted the gay market. To get his own sense of its size, he surveyed Atlanta's gay bars and learned that they sell about 30,000 cases of beer a month. "The big brands make up 80% of the volume in a bar," he explains. "So you're talking about dividing up the other 20%. We figured that potentially we could capture a quarter of that" -- which comes to 5%, or 1,500 cases a month in Atlanta, worth about $21,000 in monthly sales. To estimate the total sales of beer at gay bars nationwide, the partners assigned each major urban area a multiple based on the number of gay bars and the city's population compared with Atlanta. Thus, New York City, with about three times as many bars and more than triple Atlanta's population density, got a multiple of three. Using that admittedly rough method, Verzello and Goodwin estimated the size of the national gay market to be about $240 million. Their 5% would be $12 million. And when they added the beer that gays and lesbians purchase at restaurants and retail stores, the total U.S. market looked to be about $1 billion, of which 5% is a very big number. While the partners weren't out to make Black Sheep the gay beer, the gay market sure looked to them like a good place to start.

As for their chances of capturing their share of that market, the founders saw a number of factors in their favor. They thought gays would at least try the product of a gay-owned company, creating early demand for the beer. Gay bars and restaurants would be likely to carry the beer out of solidarity, which they figured would help them clear the distribution bottleneck. And since gays and lesbians inhabit every major city in the United States, Verzello and Goodwin theorized that they could take the brand national by initially hitting the gay bars in a city and then expanding into mainstream establishments.

First, though, they needed a beer to sell. Verzello hired his University of California at Davis brewing professor to develop a recipe. After a year and a half of testing various brews in focus groups consisting of friends and potential investors, the pair had what Verzello calls "a really great-tasting light beer."

Instead of building a brewery, the partners contracted with an existing beer maker to make a product from their recipe. The decision cut their start-up costs dramatically -- from an estimated $1.5 million to $240,000. Contract brewing also put Black Sheep in the company of some of the most successful riders of the microbrew wave, including the makers of Sam Adams and Pete's Wicked Ale. "We figured they must know something," says Verzello. He and Goodwin raised $200,000 from 18 investors in a private equity offering and poured in $40,000 of their own.

Microbrews typically compete not on price but on taste. Since most microbrews that are sold in bars and restaurants (as opposed to retail) cost roughly the same, the new brewers felt they didn't need to beat that price. "We knew we had the flexibility to set the price where we needed it to be," says Verzello. They aimed for the middle of the wholesale price range. At $22.20 a case, Black Sheep costs about the same as Amstel Light. The partners need to sell about 1,500 cases a month to cover their fixed costs. "So far, we've hit that only once," says Verzello.

Financial viability aside, isn't it asking for trouble to start a gay-owned company in an old-boy industry? Verzello and Goodwin did have to look hard for a brewery to produce the beer: 23 brewers turned them down, although only one actually said it had no interest in pursuing that market. The Lion Brewery, in Wilkes-Barre, Pa., agreed to take Black Sheep on. "The management was brand-new," says Verzello, and it was hungry for customers. The couple expected wholesalers to have reservations as well, but they didn't. Here the partners' target market may have actually worked in their favor. "Distributors are closer to the customer than brewers are," says Verzello. "They know how lucrative the gay market is." The Armory, a gay bar in Atlanta, is one of the largest liquor-selling venues in the state of Georgia.

The founders knew of at least three earlier attempts to create a beer for the gay market, and they saw much that they could improve upon. The earlier products were private-label brands (basically, someone else's beer with the brand's label pasted on). "They had crappy packaging, and the beer wasn't very good," Verzello says. Someone might try a gay-produced beer as a novelty or out of community loyalty, he says, but that only opens the door. "People won't continue to buy a beer that they don't like."

Besides, the brand names of those earlier beers -- one was called Pink Triangle, and another Pride -- smacked of patronization. Black Sheep Light Lager, in contrast, makes only a sly reference to the owners' sexuality and that of the drinkers they've initially targeted. Verzello and Goodwin intend Black Sheep's ads and promotional materials to appeal to gays and straights alike. The beer's label reads, "Our taste runs counter to the traditional. Apart from the crowd. Proudly unique . . . a beer . . . as out of the ordinary as the people who drink it." That's a message the founders hope will appeal to anyone harboring even the slightest rebel complex. Recent marketing campaigns for Dewar's White Label Scotch, Midori Melon Liqueur, and Skyy Vodka have all used similarly ambiguous language to market to straights and gays.

Verzello and Goodwin budgeted $2,000 a month per market for advertising. If the amount seems low, it's because ads placed in gay publications are considerably cheaper than the same ads in mainstream publications. A full-page four-color ad in The Southern Voice, a newspaper directed toward Atlanta's gay population, ran them $450, as opposed to $4,000 for a comparable ad in Creative Loafing, an alternative paper serving the same geographic market but not specifically targeted toward gays. The duo also scored a lot of free publicity in Atlanta by playing up the "local boys make good" angle of their story as well as the idea of a gay couple starting a company together. They amassed 57 local media mentions in the first month in their home city, including numerous mentions in The Atlanta Constitution-Journal, as well as local TV and radio interviews.

In August 1994 the David & Mark Brewing Co. introduced Black Sheep at the Atlanta premiere of Tony Kushner's play Angels in America, the first of numerous on-site marketing events. Verzello and Goodwin invited the local media and 150 restaurant and bar owners to the opening-night party, offering them the chance to be among the first to taste the beer. "It got a lot of people talking about the new 'gay' beer," says Verzello. For a month after the event, bar owners and managers called him, and when he did start knocking on doors, he reports, people knew who he was, which made for easier sales.

Based on their Atlanta experience, the founders developed a marketing formula that they thought would apply elsewhere. They would first get the attention of the local gay market through ads and stories run in local gay newspapers and magazines and through their support of social and fund-raising events to which gays would normally be attracted. Concurrently, they would make sales calls on local gay bars and restaurants, just as they had in Atlanta. Then, once they had some distribution in a city, they would capitalize on the fact that many of the managers and staff of mainstream establishments are gay and would happily help them move Black Sheep into nongay venues. The cultural events they had sponsored and would sponsor didn't attract an exclusively gay crowd, and thus would aid the founders in their mainstream push. Black Sheep had already cracked numerous mainstream venues in Atlanta: only half of the more than 100 local bars and restaurants that were carrying Black Sheep a year after its debut served a predominantly gay clientele. The founders figured that with the correct positioning, their beer could continue to appeal to all drinkers.

But Verzello and Goodwin have run into trouble trying to bring the beer to other cities. In Washington, D.C., the founders' first foray away from home, "we expected the Atlanta experience all over again," says Verzello. But in Atlanta they were the hometown boys, and in D.C. they were not. The local press was not impressed and did not deliver much free publicity. After four months of trying, the company managed to get its beer into just 20 outlets in the Washington area before backing away. "We went too fast. We didn't have a full-time rep," says Verzello. "We were still too focused on Atlanta."

Hoping to fare better in Manhattan, Verzello hired a full-time New York sales rep before the beer's Big Apple launch, in September 1995. The rep had experience in generating publicity. "We know how much PR helped in Atlanta," says Verzello. "And we know how much it hurt not to have it in D.C." The New York papers did publish some stories, and the rep was able to get the beer into some of the city's most popular gay clubs -- but not enough of them. After three months New York hadn't welcomed Black Sheep any more than Washington had, and Verzello and Goodwin put the Big Apple on hold as well. This time, Verzello says, it was because the sales rep didn't work out -- that and the fact that the company ran short of cash. With its seed capital long since spent, the business wasn't generating enough cash to support growth efforts outside Atlanta.

Beer start-ups, according to Henry King of the Beer Association of America, typically fail for one (or both) of two reasons: they're undercapitalized, or they're not making consistent beer. Verzello and Goodwin don't worry much about consistency, since the Lion Brewery, their contract brewer, enjoys a good reputation in the industry. But they have always been anxious about capital. Verzello's preoccupation with it borders on obsession. "If I could, I'd spend all my time trying to find more investors," he says. But ask Verzello about Black Sheep's monthly sales figures and he's momentarily stumped. "Oh, I need to get that out of the computer. I don't know all that off the top of my head," he says. Maybe his innocence about the numbers masks his disappointment in them: the company's original sales projection of $691,440 in its first 12 months of operation was a little optimistic; its actual sales for that period were $155,610. The founders, however, remain upbeat and hold firm to their plans to take the beer national. All they need, they say, is additional capital.

Finding capital has been a problem from the start. When Verzello and Goodwin were seeking seed funding, they calculated that they would need at least $300,000. Unable to raise that amount, they rethought a few expenses. Verzello's planned $30,000 salary was the first item to go. Legal fees were paid with company shares instead of cash. And they pushed out their schedule for expanding sales to additional cities. "Since we went slower, we didn't need as much inventory," says Verzello. Eventually, the founders got their estimated start-up needs down to $150,000. Actual costs have exceeded the $200,000 they raised, and the founding duo have had to pump a total of nearly $100,000 of their own cash into the venture.

Starting a beer company on the cheap, they say, has been a sobering experience. "Mark and I are a little burnt out," concedes Verzello. "This definitely isn't the easiest way to grow a business." So they're considering another private offering to raise an additional $300,000, which they plan to use to develop a full lager, increase their sales staff, take another crack at D.C. and New York City, and expand farther along the East Coast. They're also considering bringing on a third partner by selling a 10% equity stake. The person they have in mind has experience in evaluating companies for mergers and acquisitions, and he would bring an expertise that Verzello and Goodwin admit they lack: making the bottom line work. The potential partner would help the company secure a $200,000 line of credit, and his equity purchase would bring in another $200,000 or so in capital. And as a part-time chief financial officer, he would oversee the management of the business. "I'm not proud," Verzello says. "I want the money."

Besides, between the two of them, the founders would still own most of the company -- they currently own 75%. "That 75% will allow us to dilute down and still stay in control. We always want to be in control," says Verzello. But after a pause he adds, "Unless there's a big enough offer."

Offer?

Within five years, the founders see themselves in a possible joint venture with a large brewery, similar to a recent deal in which Anheuser-Busch acquired a 25% interest in microbrewer Redhook Ale. "There's a beer boom right now, but not everyone's going to make it," says Verzello. "You have to have good distribution, technical know-how, and advertising capabilities. And capital. All of that we could get from a big brewery."

But what would the David & Mark Brewing Co. contribute to the partnership? "The big breweries want to capture the microbrewery market," says Verzello. Craft brews made up only 1.3% of total U.S. beer production in 1994, but that percentage is expected to grow -- by at least 40% annually over the next five years, according to some industry estimates. By then the microbreweries could capture as much as 5% or 10% of production. And 10% of a $50-billion market is a lot of money. Huge brewers have spent millions to compete with craft brews. Some have produced "stealth micros" marketed to look like microbrews, such as Miller Brewing Co.'s Red Dog. "But the consumer can see through that," says Verzello.

Verzello and Goodwin think they can deliver something Verzello says a big brewery "can never get on its own": the gay market. He mentions Coors and Miller as companies anxious for a foothold in the market. Both have been the objects of gay boycotts, Coors for its past support of antigay causes and Miller for parent company Philip Morris's political donations to conservative senator Jesse Helms. "You can't buy Coors in Atlanta's gay bars. And Miller got kicked out seven years ago," he says. "Those companies are spending fortunes to gain that loyalty. Eventually, we can deliver it to them." Verzello has received at least three buyout inquiries, he claims, including one from one of the big three breweries. He won't name names.

For the moment, Black Sheep is still predominantly an Atlanta phenomenon, available at both Burkhart's Pub, a local gay watering hole, and the World Trade Club, a decidedly ungay, private men's club. "Beer appeals to everyone," observes Verzello. "Why limit yourself?"

EXECUTIVE SUMMARY

THE COMPANY

The David & Mark Brewing Co., in Atlanta, founded by business and life partners David Verzello and Mark Goodwin

Concept: Establish a microbrew-beer brand by targeting an affinity market -- gays and lesbians -- before taking the beer into mainstream bars and restaurants

Hurdles: Generating sufficient capital and distribution to create a mainstream national brand, while avoiding being pigeonholed as the "gay" beer

THE FOUNDERS

David Verzello, age 31, president, and Mark Goodwin, age 33, treasurer

Brewing backgrounds: Verzello, with a degree in economics from the University of San Francisco, completed certificate courses in Microbrewery Operations and Management and in Intensive Brewing Science through the University of California at Davis. Goodwin, whose Davidson College degree is also in economics, brewed beer at home for five years.

Family: Themselves and two dogs, Blizzard and Caliban

Personal funds invested: About $100,000

Equity held: 37.5% each

Salaries: None for now

Last jobs held: Verzello managed large commercial insurance accounts for a California agency; Goodwin worked as an insurance-company systems analyst.

A HEAD FOR PROFIT

You slide onto a stool at your favorite pub and ask the barkeep for a Black Sheep Light Lager -- or another contract-brewed craft beer. You sip it slowly. The tab, when you get it, is $3.50, and that's before the tip. Where does the money go?

$0.23 to David & Mark Brewing Co.

$0.22 to Contract brewer

$0.06 to Packaging

$0.24 to Distributor

$0.25 to Taxes (federal, state, and local)

$2.50 to The bar

Source: The David & Mark Brewing Co. and the Institute for Brewing Studies.

Company Financials First Second Third

12 months* 12 months** 12 months**

Revenues $155,6101 $2,724,000 $5,114,0003

Expenses $325,500 $2,471,000 $4,621,000

Pretax profit (loss) ($169,890)1 $253,0002 $493,000

*November 1994-November 1995 **projected

1. The David & Mark Brewing Co. fell far short of meeting its first-year projection of $691,440 in sales with a loss of just $79,000.

2. Profitability in the second year is not an unreasonable expectation. The Institute for Brewing Studies reports that the average U.S. microbrewery start-up achieves profitability after 27.6 months of sales.

3. Third-year sales of $5 million? It's possible. But Tom Potter, CEO of the Brooklyn Brewery, says that would require "a brilliant performance." In 1995, Potter says, "only 5 contract craft brewing companies out of about 100 in operation were that large, and all of them had been in business longer than three years."

WHAT THE EXPERTS SAY

Tom Potter Competitor

Cofounder and CEO, the Brooklyn Brewery, in Brooklyn, N.Y.

The best light beers are made by the big brewers because they are fundamentally technical, not artistic, achievements. They are consistent, flawless, and mediocre. I'd like David & Mark's chances better if it were selling something unique.

Verzello and Goodwin's home marketing was textbook: imaginative promotions; local publicity; starting with core accounts, and then building from there. The market is very kind to local beers for the moment. The founders' difficulties away from home, unfortunately, are also textbook. As Black Sheep found, a hometown hero is a nobody across the river. Those micros that have succeeded in a broader region have been of excellent quality -- unique interpretations or original inventions. It's hard to do that with a light beer.

Over the past few years we've seen a number of "theme" microbeers. Tun Tavern was supposed to appeal to former Marines, Harley-Davidson to bikers, Pink Triangle to gays. None of them worked inside their interest group, let alone in the mainstream. The themes varied, but the beer didn't; it was always ordinary. Even the hometown story gets tired if it's not in the bottle.

While it's possible that Verzello and Goodwin might reach $5 million in sales in their third year, that would be a brilliant performance. In 1995 there were only 5 contract craft brewing companies (of about 100 in operation) that large, and all of them had been in business longer than three years. Verzello and Goodwin should be prepared to grow more slowly.

You've got to build a brand slowly, especially when you're short on money. Forget the dreams of selling out to a big brewery in three years. First, show you can make money. Verzello and Goodwin should test their assumption that they can bring the brand into the mainstream by doing it in Atlanta first.

Microbrews are mostly unadvertised products, selling on word of mouth. Verzello and Goodwin should seed the market slowly and inexpensively, working the brand bottle by bottle. They should also choose their markets more carefully. I didn't see any rationale for going into Washington, D.C. And New York City is too expensive and very tough. Their next market should be a gay destination place, like the Florida Keys or South Beach. Tourists will go home interested in the product, and when you enter their home market, the demand will be there.

As for taking the beer mainstream, one can simultaneously market to both the gay and the straight communities, as we have with our Tuaca liqueur. You're just targeting one aspect of the straight community, the "crossover," gay-friendly straights, who tend to be young and hip.

Anyone can get distribution, but whether you can actually get market share is another question. Verzello and Goodwin need to put more dollars into sales and marketing. One brewing company I've worked with spends 22¢ of every sales dollar on marketing, but most microbrewers spend even more. The company needs a national sales manager and people on the ground selling, supplementing the distributors' efforts. And nobody's going to lend money for sales and marketing. It's the ultimate risk capital. The partners will have to sell more equity.

Contract brewing avoids a lot of the bricks-and-mortar costs. But $240,000 in seed capital is nothing, even for a microbrewer. Verzello and Goodwin made some pretty good progress for what they had to start with, but they need more capital.

Bill Svetz General manager of Fritz, a gay bar in Boston

The gay affinity will make a difference only if people like the product and think it's equal to what they've been drinking. They won't support a product just because the company that makes it is gay-owned. It's a light beer, so Verzello and Goodwin have an advantage there, because light beers sell better. But beer is a taste product. People will try it, and if they like it, they'll switch. Black Sheep's price isn't bad, but at $22 a case, we'd have to sell it for $3.50, $1 more a bottle than Miller Lite. Most of your bar clientele don't have that kind of money for a beer. Will people pay an extra buck just for community loyalty?